Fixed Income

What is Fixed-Income?

Fixed income investments, commonly known as bonds and money market securities, come in a variety of forms. They are simply loans made by an investor to a corporate or government borrower. The borrower, also known as the issuer, typically promises to pay a fixed amount of interest—known as the coupon—on a regular basis until a predetermined maturity date. At maturity, the issuer promises to return the principal amount of each bond—often referred to as the face or par value—to the investors holding them.

Types of fixed-income securities

U.S. Treasuries: issued by the federal government, the only entity permitted to print money, and thus considered the safest type of bond.

Money market instruments: issued by corporations or government entities and considered relatively low risk because maturities are usually very short.

Investment-grade corporate bonds: issued by corporations deemed by the major credit rating agencies to be in good financial condition and likely to meet payment obligations.

High yield (junk) bonds: issued by corporations considered to be at higher risk of default (i.e., missing interest or principal payments) due to financial difficulties.

Mortgage- and asset-backed securities: issued by a government agency or financial institution; the coupon payments represent cash flows from a pool of loans, such as mortgages, auto loans, and credit cards.

International bonds: issued by governments or corporations outside of the U.S.

Tax-free municipal bonds: issued by state or local governments; interest payments are exempt from federal and, in some cases, state taxes. Some income may be subject to the federal alternative minimum tax.